In our continuing series on building a Commercial HVAC Value Proposition, this week I take a look at the role changing building economics plays with investors and their service providers.
I had lunch the other day with a friend who is a senior executive at one of the top 3 Global Commercial Real Estate (CRE) firms. We often meet to discuss the dynamics driving our industries; emerging technologies, kids and, ultimately, the economy. We’ll save the kid update for later, but I’d like to share his thoughts about CRE and the economy; they’re big consumers of our industry’s services and his insights indicate a subtle shift in motivation and opportunity.
Before we go there, let’s do a little refresher on building economics. Any of you that have attended my sales classes will recognize this equation:
To determine how much impact your service program is having on a building’s asset valuation, just divide the measured savings by the cap rate. As an example, if your service program delivered $100,000 in measurable operating cost reductions (energy, water, repairs, spare parts, etc.) and the Cap Rate is 6.5%, your program would contribute over $1.5MM in asset appreciation.
The entire CRE value chain is driven to increase asset value and the way you do that is by driving “yield” which is driven by NOI. Everyone in the value chain is zeroed in on growing the topline and, to a lesser extent, reducing operating costs.
So, our discussion centered on where we are in this economic cycle and what are Investors/Owners’ strategies as it relates to increasing yield in their portfolios? A couple of years ago while discussing our impact on operating costs, he cautioned me that increasing lease revenue is in their DNA and will always be their preferred method of driving yield. There has always been a “maximizing occupancy solves most all investment performance objectives” mentality. The CRE industry is in a very healthy place right now. Occupancy rates are high. But that success has put more pressure on the industry to find ways to grow and, at least, sustain investment yields when top line growth options are being exhausted, occupancy rates of 107% are not really an option.
“…maximizing occupancy solves almost all investment performance objectives”
As top line-oriented yield strategies fade, a transition to reducing controllable operating costs, driving NOI and, ultimately, asset valuation is now coming back into vogue, not by choice but by necessity. There really aren’t any other options for driving yield.
The whole value chain is under continual pressure to deliver yield. Take for instance an institutional investor. With a sizable portfolio of buildings, they’ve tied up a significant amount of capital and expect a targeted yield for their investment. With occupancy maxed out and most top line growth tricks exhausted, the pressure to perform doesn’t diminish.
And that’s where our industry comes in. His eyes got pretty big when I started sharing some of the results we are seeing with our Mechanical Contracting partners. He really got excited when I explained that by leveraging the underlying Preventative Maintenance (PM) we are able to pull a lot of building data to drive insights that drive savings. The fact that those savings don’t rely on capital investment is a real plus as well.
So, it’s important, if you are calling on the CRE market, to clearly understand building economics and how your services can help the CRE value chain deliver value to owners and investors. Incorporating these measurable benefits into your discussions and proposals will do a lot to differentiate how your prospects and customers see your company and your services. From Preventative Maintenance to equipment and controls upgrades to driving a capital planning process, you are well positioned to your CRE clients generate the yield they need through a comprehensive program of measurably reducing their building operating costs.